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62
behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that
could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this
general indemnification to be remote.
Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for information regarding the effect of new accounting
pronouncements on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Hedging Instruments
In countries outside the U.S., we transact business, in U.S. dollars and in various other currencies. In Europe and Japan,
transactions that are denominated in Euro and Yen are subject to exposure from movements in exchange rates. We hedge our
net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our
earnings and cash flows will be adversely affected by changes in exchange rates. We have foreign exchange option and
forward contracts for Yen- and Euro-denominated revenue.
In fiscal 2007, 2006 and 2005, our revenue exposures were 35.5 billion Yen, 32.8 billion Yen, and 26.4 billion Yen,
respectively. In fiscal 2007, 2006 and 2005, our revenue exposures were 595.5 million Euros, 504.7 million Euros, and 411.4
million Euros, respectively.
Our Japanese operating expenses are in Yen and our European operating expenses are primarily in Euro, which
mitigates a portion of the exposure related to Yen and Euro denominated product revenue. In addition, we hedge firmly
committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and losses;
however, the gains and losses on these contracts largely offset gains and losses on the assets, liabilities and transactions being
hedged. We also hedge a percentage of forecasted international revenue with purchased option contracts. Our revenue
hedging policy is intended to neutralize the impact on our forecasted revenue due to foreign currency exchange rate
movements. As of November 30, 2007, total outstanding contracts were $673.0 million which included the notional
equivalent of $440.3 million in Euro, $154.3 million in Yen, and $78.4 million in other foreign currencies. These hedges are
foreign currency forward exchange contracts which hedged our balance sheet exposures and purchased put option contracts
which hedged our forecasted revenue. As of November 30, 2007, all contracts were set to expire at various times through
June 2008. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance.
However, to mitigate that risk, we only contract with counterparties with specific minimum rating requirements. In addition,
our hedging policy establishes maximum limits for each counterparty.
In addition, we also have long-term investment exposures consisting of the capitalization and retained earnings in our
non-USD functional currency foreign subsidiaries. As of November 30, 2007 and December 1, 2006, this long-term
investment exposure totaled a notional equivalent of $119.7 million and $85.9 million, respectively. At this time, we do not
hedge these long-term investment exposures.
Economic Hedging—Hedges of Forecasted Transactions
We use foreign exchange option contracts to hedge certain operational (“cash flow”) exposures resulting from changes
in foreign currency exchange rates. These foreign exchange option contracts, carried at fair value, may have maturities
between one and twelve months. Such cash flow exposures result from portions of our forecasted revenue denominated in
currencies other than the U.S. dollar, primarily the Japanese Yen and the Euro. We enter into these foreign exchange option
contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not
speculative in nature.
We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss),
until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the
cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it